Spanish Ire, Symbolized by a Carrot: Central Government is Losing Control

MADRID — As Spanish domestic politics threaten to spin beyond the control of the central government, they are also making it harder for Prime Minister Mariano Rajoy to meet Spain’s financial obligations to the rest of the euro zone.

Mr. Rajoy needs to replenish Spain’s coffers and convince investors and his European counterparts that his government can stick to its budget deficit targets. He will need the euro zone’s confidence if he decides to tap European bailout money for Spain’s banks or request help from the European Central Bank in controlling Madrid’s borrowing costs.

But in Spain’s most economically powerful region, Catalonia, pushing through new central government taxes could prove difficult at this point, because the regional government has set elections for November that many voters may see as a referendum on Catalan independence.

Already, collection of current taxes is no sure bet in some parts of Spain. Consider the Catalan carrot rebellion.

To avoid an increase in the value-added tax that the Rajoy government put into force on Sept. 1, a municipal theater in Bescanó, a Catalan village, has found an innovative loophole: sell carrots in lieu of entrance tickets.

Carrots are among the staple foods exempt from the tax increase, so the Bescanó theater is selling them for 13 to 15 euros each, or $17 to $19. Each carrot entitles the bearer to see a play in November.

Quim Marcé, director of the Bescanó theater, said: “The theater world was already in very bad shape, but this tax increase will basically kill off small theaters like ours. We’re perhaps pioneers, but I really think that other theaters will have to follow our example and find ways around this unsustainable tax.”

Investors have already shown renewed doubts, demanding sharply higher interest rates to hold Spanish government debt. On Wednesday, the interest rate on Spain’s 10-year bonds approached 6 percent for the first time in months, while European shares and the euro fell sharply as investors reacted to social turmoil in Spain and Greece.

On Thursday, the Rajoy government plans to present a draft budget for 2013 that is aimed at reducing Spain’s deficit to 4.5 percent of gross domestic product in 2013, from a target of 6.3 percent this year. But hitting either target depends on higher tax revenue even as unemployment and recession are sending protesters into the streets and prompting a political revolt in some of the country’s largest regions.

“Spain is the only country in the world that must contend with a banking, economic, sovereign debt, political and constitutional crisis all occurring simultaneously,” said Nicholas Spiro, founder of Spiro Sovereign Strategy, a London consultancy that helps assess sovereign debt risk.

Javier Díaz-Giménez, an economics professor at the IESE business school campus in Madrid, said Mr. Rajoy’s tax drive risked prompting “plenty of imaginative ways to interpret the law.” He warned it could also swell the size of an underground economy already estimated as representing 20 percent of Spain’s overall economy. “Raising taxes is only truly effective,” Professor Díaz-Giménez said, “when it comes together with a proper plan to combat fiscal fraud.”

Mr. Rajoy’s center-right Popular Party won a parliamentary majority last November, when voters punished the previous Socialist administration for economic mismanagement. But since Mr. Rajoy took office, Spain has sunk back into recession, unemployment has continued to rise, to 24.6 percent, and four rounds of austerity measures have been announced.

The latest package, announced in July, added up to 65 billion euros and included the increase in the value-added tax to 21 percent from 18 percent despite previous pledges by the government not to raise it.

The tax increase has especially angered people working in segments of the economy like the performing arts, which previously received preferential tax treatment. Some street protests against the tax have been led by celebrities like the film actor Javier Bardem.

The higher tax has also played a part in the heightened tensions between Madrid and regional governments, which have been ordered by Mr. Rajoy to cut their own budget deficits to 1.5 percent of G.D.P. this year. The central government put down a tax revolt in Extremadura this month; despite being controlled by Mr. Rajoy’s party, the regional government tried to exempt culture from the tax increase decreed by Madrid.

If anything, the domestic dissent is gaining momentum. On Wednesday, workers in the Basque Country and Navarra regions held a general strike to protest Mr. Rajoy’s austerity cuts. A day earlier, thousands of demonstrators clashed with the police outside Parliament in Madrid.

The protests and the standoff with the regions — particularly the separatist push in Catalonia — have left Mr. Rajoy little maneuvering room with the rest of Europe.

Euro zone finance ministers are still waiting to learn if and when Mr. Rajoy will request release of any of the 100 billion euros in banking bailout loans they agreed in June to make available. A banking audit that Mr. Rajoy commissioned is due out on Friday, which should help determine how much assistance Spanish banks may require, but Madrid has continued to wrangle with its euro zone partners over the exact conditions for the disbursement of the rescue money.

Mr. Rajoy has also been reluctant to take on further European scrutiny of his government’s finances, which could result in more demands for spending cuts if he invokes the new bond-buying program that the European Central Bank announced on Sept. 6. But if Spain’s borrowing costs in the commercial markets continue to rise, he might soon have little choice.

As the government readies its 2013 budget draft, Spain’s 17 regions are not only struggling to cut their budget deficits but are also crippled by mountains of debt accumulated during a decade-long boom led by construction.

On Tuesday, Andalusia announced that it would tap into an emergency fund set up by the central government to help regions meet their debt repayment obligations. Andalusia’s 4.9 billion euro request means that four of Spain’s 17 regions have already requested three-quarters of the 18 billion euro emergency fund the Rajoy government has set aside.

“The substantial deterioration in tax revenues after the first quarter puts the chances of meeting the full-year target in doubt,” Fitch said. It noted that three regions — Extremadura, Murcia and Navarra — had already exceeded this year’s 1.5 percent target.

While the regions are struggling to balance their books, so too is the government in Madrid. The central government’s running deficit reached 4.77 percent of G.D.P. through the end of August, according to figures released Tuesday. That makes it increasingly doubtful Mr. Rajoy can come in under the 6.3 percent full-year target.

In Bescanó, the carrot-for-tickets program proceeds apace. Town Hall has allowed the theater to set up a food stall outside the entrance to sell carrots: 13 euros for advance sales, 15 euros for a carrot at the door.

Carrots carry only a 4 percent value-added tax, so the theater pockets the 17-point differential, or roughly 2.40 euros per spectator. Mr. Marcé said the tax savings would enable his theater to maintain a full season, rather than cut back to two or three plays.

Mayor Xavier Soy of Bescanó is fully behind the ploy. “I see it as a clever way to protest against a tax hike that could really hurt culture,” he said.

Meri Yanes, an actress, compared the dark atmosphere of “Suicides,” the play she was rehearsing on Wednesday, to an Edgar Allan Poe short story.

“Everybody is pretty depressed at the moment,” Ms. Yanes said, “so we’re trying to take to extremes what is already the general mood.”